|29 July, 2019

INTERVIEW: Major Gulf sovereign wealth funds gear up for ESG investing

Wallace highlights key steps for GCC countries to attract more ESG investors

Image used for illustrative purpose. Hands of Businessman Notebook and documents working .

Image used for illustrative purpose. Hands of Businessman Notebook and documents working .

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Despite being hydrocarbon-based economies, four Gulf countries are laying the groundwork to be aligned to Environmental, Social, and Governance (ESG) standards through their sovereign wealth funds’ (SWF) undertakings, global head of ESG Investment at the world’s fifth largest asset manager said.

Speaking to Zawya at State Street Global Advisors’ (SSGA) office in Abu Dhabi, Nathalie Wallace sounded optimistic about the outlook of the region’s integration of ESG risks and investing into their economies.

“We think tremendous change has taken place in Gulf region in terms of ESG adoption over the last two or three years. It has been driven by government-led ambitions to change the way capital is allocated, companies are run, and integrating those ESG factors and metrics in the way companies drive their strategies,” Wallace said.

“It has also been driven by the opening of economies to international capital, especially in Saudi Arabia,” she added.

Gulf SWFs in action

Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA), Qatar Investment Authority (QIA), and Saudi Arabia’s Public Investment Fund (PIF) are among founding members of ‘One Planet Sovereign Wealth Funds’, a group set up in 2018,  with the aim to accelerate integration of financial risks and opportunities related to climate change in the management of long-term asset.

“That is a big statement and commitment, something to be very much applauded in the world, that four out six founding members are from this region,” Wallace said.

On whether any of the Gulf sovereign wealth funds has already adopted ESG standards in their investments, SSGA’s Wallace said:  “Not yet, but that is why we have been here this week. There is definitely a great engagement on education and understanding of ESG. So we are moving from the ‘if’ and original guidelines and concepts into the ‘how’ to implement these.”

Wallace has been steering the ESG strategy for SSGA, the investment management arm of New-York-listed financial giant State Street Corporation which has $33.90 trillion in assets under custody and administration and $2.70 trillion in assets under management as of June 30, 2018. She is also trade advisor to the French government and an active member of Climate Protection Action Committee.

As for whether being mostly hydrocarbon-based economies presented additional challenges in accelerating ESG implementation in the GCC, Wallace said: “It is a key challenge because of the production, but Norway, which is also a founding member is a big producer as well. It is also a challenge for consumers of oil. So, is it more of a challenge here than economies reliant on fossil fuel such as China? It is the same.”

According to a recent Reuters report, sovereign wealth funds from the Middle East are being pushed by climate change pledges and regulators towards diversifying away from oil and gas investments, but are still stopping short of following Norway that is moving ahead in that aspect. Read more here.

Earlier this month, eight global asset managers, including SSGA, with a combined $15 trillion assets under management, announced founding ‘One Planet Asset Managers Initiative’ to support implementing the framework of One Planet Sovereign Wealth Funds.

Attracting ESG investors

Wallace highlighted key steps for the Gulf region to attract more ESG investors.

The first step is to address the companies’ ESG issues that are material to their long-term performance and the next step is to establish strong national corporate governance codes, she said.

“We are seeing phenomenal change and adoption in the region especially in Abu Dhabi and the UAE in the diversity in the workplace and on boards, which is really beneficial for long-term performance in this region,” she added.

As for the readiness of GCC-based companies to attract ESG investors from around the world, Wallace sees that “the institutions that are regulating these GCC companies are ready to look at how to implement more ESG frameworks to start with some baseline reporting. The ecosystem is getting ready.”

Earlier this year, the CEO of Abu Dhabi Financial Services Regulatory Authority (FSRA) told Zawya that the authority plans to introduce standards of financial disclosures for ESG criteria for relevant entities at Abu Dhabi Global Market. Read more here.

The UAE capital’s international financial center has also been attracting global wealth and asset managers eyeing returns on sustainable investments. Read more here.

However, according to SSGA’s Wallace, data challenge and a clear reporting methodology remain key barriers to attracting ESG investors.

“There is no mandatory ESG reporting even in Europe, and it is still voluntary. In that sense, there is no full best in class regulatory environment that the GCC could put in place,” she said, adding that the work of Sustainability, Accounting, Standard Board (SASB) would help in focusing on key metrics that companies should be reporting on, and for investors to understand how capital is allocated.

Speaking about the overall rise in demand for capital allocation to be made according to ESG principles, SSGA’s Wallace said: “In terms of capital flows around the world, we’ve seen that assets managed sustainably have grown by more than 60 percent over the last two years.”

A recent report by ratings agency by Moody’s Investors Service said that ESG risks are becoming more significant for banks’ creditworthiness as regulatory policies, market developments and social attitudes change rapidly, putting the banks under growing pressure to integrate ESG considerations into their investment decisions. Read more here.

(Reporting by Nada Al Rifai; Editing by Brinda Darasha)

(nada.rifai@refinitiv.com)

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